Real estate has it’s own terminology and acronyms. In this and future Real Estate ABC’s posts I will discuss some of the commonly used terms and vocabulary.
A short sale is a sale of real estate in which the sale proceeds fall “short” of the balance owed on the property’s mortgage loan. It often occurs when a borrower cannot pay the mortgage on their property, but the lender decides that selling the property at a moderate loss is better than the alternative – foreclosure. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner sells the property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Neither side is “doing the other a favor;” a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than would result from foreclosure or continued non-payment, and borrowers are able to mitigate damage to their credit history. A short sale is typically faster and less expensive than a foreclosure. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.
Short sales are different from foreclosures in that a foreclosure is forced by a lender, whereas both lender and borrower consent to a short sale. However, this consent may change at any time, and negotiations may be ongoing between the lender and borrower even while the short sale listing is on the market. The borrower may decide to remain and refinance their house, or become obstinate and force foreclosure. The bank may renege as well if they decide to stick with the current borrower, or if they disapprove of the sale price. A short sale contract includes a contingency where the bank must approve the sale – also know as 3rd party approval.
Multiple levels of approval and conditions are very common with short sales. Secondary mortgage lenders – as the result of home equity loans – will likely need to approve the terms of the sale as well. The possible wide array of parties to the sale can complicate the process and account for substantial delays in the sale.
